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August 12, 2016
FinCEN issues final rules requiring identification and verification of the beneficial owners of legal entity customers and ongoing customer due diligence requirements
The Financial Crimes Enforcement Network (FinCEN) recently issued final rules relating to customer due diligence requirements that are applicable to futures commission merchant (FCM) and introducing broker (IB) Members. Under the new rules, FCM and IB Members will be required to identify and verify the identity of beneficial owners of legal entity customers. The final rules also amend the AML program requirements to explicitly require that AML programs include appropriate risk-based procedures to conduct ongoing customer due diligence. NFA intends to amend NFA Compliance Rule 2-9 and the corresponding Interpretive Notice entitled FCM and IB Anti-Money Laundering Program to reflect these changes. While FinCEN's final rules became effective on July 11, 2016, firms are not required to comply with the final rules until May 11, 2018. However, firms should begin considering modifications to their AML programs, as implementation of the new requirements may require changes to systems and processes. A brief summary of FinCEN's final rules is set forth below.
Beneficial Ownership Requirements
FinCEN is amending its regulations to require financial institutions to establish and maintain written procedures reasonably designed to identify and verify the identity of the beneficial owners of legal entity customers. FinCEN defines beneficial owner to include each individual who directly or indirectly owns 25 percent or more of the legal entity customer's equity interests (ownership prong) and an individual with significant authority to control, manage, or direct the legal entity customer (control prong). An individual with significant control authority includes a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, Treasurer, or any other person who regularly performs similar functions. FinCEN expects that there will be at least one beneficial owner under the control prong for each legal entity customer.
The final rule excludes FCMs, IBs, commodity pool operators (CPOs), commodity trading advisors (CTAs), retail foreign exchange dealers (RFEDs), swap dealers (SDs), major swap participants (MSPs) and pooled investment vehicles operated by these entities from the definition of legal entity customer. Accordingly, FCMs and IBs do not have to apply the beneficial ownership requirements to new accounts opened for commodity pools advised or operated by CPOs or CTAs.
The beneficial ownership requirements only apply to new accounts opened on or after May 11, 2018 by a legal entity customer. Under the new regulations, FCMs and IBs must identify the beneficial owners of legal entity customers opening new accounts by obtaining certain identifying information from, and certified by, the individual opening the account. To verify the identity of the beneficial owners of the legal entity customer, FCMs and IBs must follow risk based procedures that, at a minimum, contain the elements of the firm's customer identity verification procedures for customers who are individuals in its Customer Identification Program. FinCEN is also requiring FCMs and IBs to make and maintain records of all beneficial ownership information obtained in connection with identifying and verifying beneficial owners. Records of identifying information obtained must be retained for five years after the account is closed and records of the description of the documents and the non-documentary methods used to verify identity for five years after the record is made.
IBs and FCMs must use beneficial ownership information in meeting their obligations under OFAC regulations, including complying with OFAC-administered sanctions. However, FCMs do not need to include information obtained under the beneficial ownership requirements in responding to Section 314(a) information requests, as the regulation implementing the Section 314(a) requirement does not require the reporting of this information.
AML Program Rule Amendments
FinCEN is further amending its regulations to explicitly require that FCMs and IBs include risk-based ongoing Customer Due Diligence (CDD) procedures in their AML programs. Specifically, FCM and IB AML programs must include procedures to: (i) understand the nature and purpose of customer relationships to develop a customer risk profile; and (ii) conduct ongoing monitoring to identify and report suspicious transactions, and on a risk basis, to maintain and update customer information. FinCEN indicates that "customer profile" means the information gathered about a customer to serve as a baseline against which to assess potential suspicious transaction reporting. The obligation to maintain and update customer information on a "risk basis" means updating customer information when the FCM or IB becomes aware of information that is relevant to assessing or re-evaluating the risk posed by the customer during its normal monitoring.
If you have any questions regarding this notice, please contact Valerie O'Malley, Director, Compliance (312-781-1290 or firstname.lastname@example.org) or Anibal Carlo, Manager, Compliance (312-781-7899 or email@example.com).